Silicon Valley North #47 September,
2002

The Way I See It… by Michael C. Volker

Do
we really need a “junior junior” stock exchange?

The Toronto
Stock Exchange (TSX) is thinking about
launching a 'junior junior' stock exchange. This would provide a home for those
companies that no longer meet the listing criteria for the nascent TSX-Venture
Exchange (TSX-V). Many companies got onto the TSX-V with so-called
"Tier-3" status. This was done to accommodate those that moved over
from the "unlisted" market, previously referred to as the CDN when
the TSX-V (the former CDNX) was created from the merger of the Alberta, Vancouver,
and CDN markets.

Stock exchanges are like clubs. The holy
grail for technology companies is to be listed on Nasdaq. Like
clubs, stock exchanges have different admittance criteria and, as such,
companies that belong to them enjoy a certain status. Continued listing
standards are generally lower than those required for initial entry. When
companies fail to adhere to these, they risk expulsion. This is what’s
happening now on Nasdaq which is faced with having to
deal with many companies that have fallen from grace.

Similarly, an argument in favor of a new exchange is that
the TSX-V will appear more credible with the riff-raff gone. However, instead
of creating a new exchange and brand, wouldn’t it make a lot more sense to use
a simple designation to identify companies that get offside? Presently, Tier 3
companies’ ticker symbols start with the letter “Y”. A qualifier of this type
should do the trick. Companies wouldn’t have to list and de-list from different
exchanges. It would also be easier for companies to go public earlier (yes, I
know that's a contentious topic but if that's what it takes to get capital, it
should be an option to companies) and then migrate to the higher ranks by
removing the "Y" rather than going through a
more complicated process.

Interestingly, a recent tax expert noted that these Tier 3
companies were, according to Canada Customs and Revenue Agency, not considered to be public companies
because they don’t trade on a recognized stock exchange. Hence, investors in
such companies could benefit tax-wise. For example, the $500K life-time capital
gains exemption for private companies would apply. Similarly, other private company
perks may also apply. Putting these companies on a "recognized"
exchange, however junior it may be, could remove such benefits. (Securities
regulators and our tax department are inconsistent in their definitions on what
constitutes a public company.)

How will a new, junior-junior exchange really help the
technology sector? David Raffa, writing in Business in Vancouver
recently, suggested that the TSX's time would be better spent in figuring out
how to make the TSX-V work more effectively for tech companies in raising
capital. Catering to the tech sector and promoting itself
more - building on its successes should be a priority. Focusing on the
opportunities in the tech sector would be more productive than fussing around
with an even more junior market.

I had
to chuckle at a recent article in Red Herringabouta Vancouver-based software company. It
comments that “the Vancouver
penny stock market—and the characters who lurk there….isn't a market in which
value, like cream, rises to the top. It's a world where prices tend to go up
because someone is helping them up.”

As
we’ve now seen, by several recent examples, the junior markets aren’t the only
places where you’ll find mis-dealings. What’s been happening in the major U.S. markets makes the “characters” on Vancouver look like kids
caught dipping into the candy jar.

Let’s
focus on making the current TSX-V really hum. A lot of work needs to be done in
the public education area. Rather than fighting the futile battle of trying to
operate a “clean” market, let’s be more pragmatic. There are always going to be
scams and cheats.

The
way I see it, we must make the TSX-V work as a venture capital venue for
technology companies. Doing this will result in more
winners and there’ll be less concern about hiding the losers under another
umbrella.

Michael Volker
is a high technology entrepreneur and director of SimonFraserUniversity’s Industry
Liaison Office. He oversees Vancouver’s Angel Technology Network and is Chair
of the BC Advanced Systems Institute and past-Chair of the VancouverEnterprise
Forum. He may be reached at mike@volker.org.